Rectangle pattern: formation conditions and trading strategy

Rectangle pattern: formation conditions and trading strategy

Today we will continue talking about candlestick patterns, knowledge of which is necessary for competent market analysis and making optimal trading decisions. The rectangle pattern occurs quite often on charts and is a good opportunity for a trader to open a profitable trade. At its core, the rectangle represents the consolidation of the market after a strong trend movement. The price of a trading instrument fluctuates in a horizontal range. Its upper and lower levels are support or resistance lines. Let’s see how the rectangle pattern can look like on a price chart.

This is an example of a bullish rectangle pattern. As you can see, the price consolidation started on the upward movement. For some time it moved in a small horizontal range. Then there was a breakout of the resistance level, which indicated that the trend of growth in the price of the trading instrument continued. A similar situation can arise in a bear market.

How to use the rectangle pattern in trading

How to use the rectangle pattern in trading

The rules are very simple. They will be available for understanding even for novice traders.

We proceed as follows.

First, you need to make sure that a trend has formed in the market.

When a rectangle appears, draw support and resistance lines. This is done through the lows and highs of the price.

Before deciding on a possible entry into the market, we look at the chart of the higher timeframe. Perhaps there are already signals for a reversal or trend continuation. They must be taken into account.

Then we observe the market situation. If the price breaks through one of the lines of the rectangle, then you can open an order in the direction of the existing trend. On an upward movement, the price should break through the resistance line, on a downward movement – the support line. We enter the market at the opening of the next candlestick after the breakout.

The level is considered broken if the candlestick closes above / below it.

It is recommended to set take profit at a distance equal to the height of the rectangle in points. It has been noticed that in most cases the price will pass it. We limit the loss by placing a stop loss. We set it slightly below the minimum (for purchases) or slightly above the maximum (for sales) of the breakout candle.

Now let’s see how the above looks in my example:

The rectangle pattern can be seen on the charts of any trading instruments during the period of trend movements. It is useful to use it in your trading to increase profits.